Joseph Chen, chairman and CEO of Renren, center, prepares to ring the opening bell with other executives at the New York Stock Exchange in New York, May 4, 2011.

It’s been almost nine years since Sarbanes-Oxley 404 came out, and investors might be getting more comfortable with seeing periodic disclosures of material weaknesses. That’s good news for Chinese companies looking to list in the U.S., because such disclosures have been particularly common among them in recent months, according to Morningstar IPO strategist Bill Buhr.

“Almost every time we look at some of these Chinese IPOs that have come down recently, you get to the risks section and it says their auditing team discovered a material weakness or an accounting deficiency,” Buhr said. “There’s been a lot of concern, and not just with Chinese IPOs, about the potential for fraud with these kinds of terms. But Chinese IPOs have had a really, really strong performance.”

Long-term investors might ultimately shun such companies over concerns about material weaknesses, but, for now, Chinese IPOs in the U.S. have had huge momentum with short-term traders. The last 20 Chinese IPOs to list on U.S. exchanges averaged returns of 22.1% on their first day of trading, according to data from Dealogic. And while many have made such disclosures, they have managed to keep up performance. Over three months of trading, the 15 most recent Chinese IPOs have averaged a return of 18% since their IPO — of course, the numbers varied widely from apparel maker China Xiniya Fashion’s decline of 53.3% to Internet television company Youku.com’s 236.7% gain.

Renren seems to have some very serious questions surrounding it. As Lynn Cowan reported for Dow Jones Newswires on Tuesday:

Renren is coming to market amid a string of data and accounting-related issues raised in the past week. On Tuesday, Renren’s audit committee head said he had resigned, following Citron Research’s allegations last week of financial fraud at his own company, Longtop Financial Technologies Ltd. (LFT).

Renren last week also changed a key data point in its prospectus, saying its user base rose 19% in the first quarter, compared with a previously reported growth rate of 29%. The prospectus didn’t explain the reason for the change, but it came after some analysts and investors questioned the accuracy of its figures.

Renren also disclosed a material weakness related to insufficient accounting personnel, and a significant deficiency stemming from not having a formal policy for treasury functions and investment of its cash.

Other companies have had equally troubling disclosures. China Century Dragon Media, a Chinese television advertising firm which went public in February, warned it may “experience difficulties in implementing and maintaining adequate internal controls.” Qihoo 360 Tech Co, a Chinese Internet company that went public in March, said in its offerings that it had “identified one material weakness and several control deficiencies in our internal control over financial reporting,” adding “there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis.” Qihoo shares more than doubled in their debut, while China Century Dragon shares rose 1% on their first day of trading. China Century Dragon shares were eventually halted by NYSE Regulation in March, and are already being targeted by securities fraud lawyers.

Investors are having trouble figuring out if these disclosures really mean anything, which might explain their willingness to buy into the IPOs.

“A lot of times it might just be weak accounting processes, a lack of knowledge, or just a bit of sloppiness,” Buhr says. “I feel like we hold U.S. companies to a higher standard. Because these are private companies going public, they do way more due diligence around their numbers and their books as they prepare for it. But you probably do see [material weaknesses] slightly more with new companies.”

To that point, such disclosures happen even with U.S. IPOs. General Motors, for example, disclosed around the time of its IPO last year that its disclosure controls, procedures and internal control over financial reporting were not currently effective, but said in February that its management and board determined the material weakness no longer exists.

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